Question

Kristen Larson just graduated at the top of her massage class from the Aveda Institute in Des Moines, IA. Her plan is to move to Sioux City, IA for at least 5 years so she can spend time with her elderly grandparents and gain experience before branching out into a top salon in a large city.

Upon graduation, Kristen received a job offer from Belle Touché, an Aveda Salon and Spa in Sioux City, for $60,000 dollars (including salary and insurance). Kristen would have to work Tuesday through Saturday from 9am-6pm for 50 weeks out of the year. The salon would pay for all of Kristen's supplies and equipment but she would need to put 20% of her tips each day into tipshare for the front desk and clean-up employees. Tips are estimated at $10,000 per year.

Kristen also is considering using her $7,500 savings to be her own boss so she can work less and more flexible hours. For $125 per week ($6,500 per year), she can rent a room at Salon Volume but she would have to provide her own supplies, equipment, and insurance. She plans to schedule massages for 25 hours per week at an average rate of $60 per hour and spend 5 hours per week on other business duties (scheduling, bookkeeping, cleaning, purchasing, etc.) for 50 weeks of the year. Tips average 15% of the cost of services and the cancellation rate is 5%. Kristen's estimated costs are detailed below.

-Massage Table: $1,500 (one time expense)

-Lotions, Oils, Linens, Candles, and Other Supplies: $150 per month

-Remaining on her Parent's Health Insurance (she is only 20): $100 per month

-Advertising: $60 per month

-Liability Insurance: $50 per month

If Kristen takes the job at Belle Touché, she will be able to earn 2% interest, on the money in her savings account. If she decides to work for herself, she will have 10 more hours of leisure each week which she values at $20 per hour.

Calculate Kristen's annual economic profit for each alternative using the template provided. (Please note, each cell may not have an entry for both options.) All relevant values are gathered below.

	Salary					$60,000
	Tips					$10,000
	% of Tips Needed to Put into Tipshare for the Front Desk and Clean-up Employees					20%
	Savings Amount					$7,500
	Interest on Savings Account					2%
						Salon Volume
	Charges for One Hour of Massage					$60
	Hours of Massage per week					25
	Working Weeks in a year					50
	Rental Expenses per year					$6,500
	Cost of a Massage Table					$1,500
	Lotions, Oils, Linens, Candles, and Other Supplies Expenses per month					$150
	Remaining on her Parent's Health Insurance Expenses per month					$100
	Advertising Expenses per month					$60
	Liability Insurance Expenses per month					$50
	Tips as a Percentage of the Cost of Services					15%
	Cancellation Rate					5%
	Value of Leisure per hour					$20
	Additional Leisure Hours per week					10
	Number of months per year					12
		Belle Touché	Salon Volume
	Salary/Total Revenue
	Kristen's Tips
	Interest Received
	Value of Leisure Time
	Total Economic Benefit
	One-Time Expenses
	Rental Expenses
	Total Monthly Expenses
	Cancellation Expenses
	Total Economic Cost
	Total Economic Profit
	Which option should she choose based on her economic profit?
			should be chosen based on the economic profit.

Answer 1

On the basis of the details shared, Kristen should rent a room at Salon Volume and work for herself as that would give her higher economic profit of $ 80180 compared to $ 68150 by working at Belle Touche.

Thus there is an economic benefit of (80180-68150) = $ 12030 by working for herself at Salon Volume.